An American Perspective from China

China’s May Export Surge — Is It Really Good News?

Yesterday, China announced that its exports in May surged 48.5% compared to the same month last year. Imports into China rose by nearly the same percentage, 48.3%, but overall, China’s trade surplus for the month spiked to a historically strong US$20 billion. Stock markets in Shanghai and Shenzhen rallied 3% on the news, after a disappointing past two weeks, taking it as a sign that China’s economic recovery is solidly on track. Stocks on U.S. markets also rose sharply this morning in response to the news. So what do these latest trade figures actually mean, and are they really the good news markets think?

For Chinese companies selling abroad, it definitely is good news. Chinese exporters were hard hit by the fall-off in foreign demand last year that followed from the global financial crisis. Total exports dropped 16% in 2009, compared to 2008, a loss of over US$ 200 billion in business. In some months last year, exports were down by as much as 26%. For the past couple of months, starting in December, China has reported exports growing by an average of 26%, year-on-year. That sounds impressive, but in fact, it barely puts export totals back to the level they were at before the crisis. When you run the numbers, exports in the first four months of 2010 were only up 2.7% compared to the same period two years before. In contrast, exports this May rose 9.3% compared to May 2008. For the first time since the financial crisis began, China’s export markets aren’t just climbing their way out of a hole, they’re actually growing. So in that sense, stock markets are right to see this is as positive news for many Chinese companies.

Whether it’s such fantastic news for the Chinese economy, though, is another matter. Among economists, here in China and abroad, there’s a pretty widespread consensus that China needs to move from an export-driven growth model to a domestic consumption-driven one. When China ran a rare trade deficit in March, some analysts touted it as evidence the country was already making that structural adjustment — and making it, Chinese officials were quick to add, without the need to appreciate the Renminbi. At the time, I said wait a minute, not so fast. This could be a trend, but it could also be part of a seasonal production cycle where Chinese companies import raw materials and components in the spring, in order to gear up to export finished products later in the year. May’s export surge, and the rapid flip back to a rather sizeable trade surplus, make it look like that may be exactly what’s happening. And that means the big shift everyone’s looking for — to a more mature, sustainable growth model — hasn’t happened yet. It also casts doubt on suggestions that such a structural adjustment will be as quick, easy, and painless as some might like to believe.

For those who are interested, here a clip of me saying pretty much exactly the same thing on CCTV News BizAsia today. And here’s another clip of me talking about renewed U.S. pressure on China over its exchange rate, as well as the latest Chinese inflation figures expected out tomorrow. I should add that, by knocking the legs out from under Chinese arguments that a structural adjustment is taking place without Renminbi appreciation, China’s May export surge is likely to feed into growing U.S. impatience over China’s hesitation in moving on the exchange rate. Whether this is a good thing or bad thing depends on your view on this subject.

The impatience is growing. This from a Bloomberg article regarding Geithner’s Senate testimony Thursday morning:

The Senate will vote “soon” on a measure aimed at getting China to raise the value of the yuan, Senator Charles Schumer of New York told Geithner at the hearing.
“This is fair warning,” said Schumer, a Democrat and lead sponsor of the legislation. Lawmakers, “despite the administration asking us not to do it, are going to move forward with our bipartisan legislation to provide specific consequences for countries that fail to adopt appropriate policies.” Schumer said yesterday that the Senate would vote within two weeks.
Geithner, in response, said “I recognize, and I think it’s very important for China to understand,” that Schumer’s legislation “has very broad support” from Democrats and Republicans.

Separately, but related, RBS’s analysis of the export numbers suggested the growth in exports is probably partially arising from market share gains. That would imply other countries are losing market share and thus will not be happy with China either.